Abstract

As the EU expands, the focus is on the Western Balkans region1, which is rich with opportunity and potential. It is experiencing significant improvements in terms of reforms, economic growth and foreign direct investment (FDI). Developing economies such as those in the Western Balkans are particularly dynamic, which can mean rapidly changing costs and conditions for investors. The region has made
strong progress, outpacing Central Europe in economic growth with an average gross domestic product (GDP) increase, these latest years. For the next several years, the markedly strong economic development is expected to continue in Western Balkans. Inflation has largely been kept under control, and is expected to decline further in the near future. The Western Balkans are improving risk profile and economic outlook are also validated by the international credit ratings. As unemployment (in almost all Western Balkans countries) is still high, sustainable economic growth (Redzepagic and Llorca 2007) and job creation are the major challenges the region faces. It is important to mention, for example, that the FDI into the region was 3.4 billion of euros in 2005, but also the cumulative FDI inflow in the region was near 15 billion of euros for the five‐year period of 2001‐2005 (Redžepagić and Richet 2008). As the countries of the region rarely invested abroad, net FDI inflows also played a key role in financing foreign trade imbalances that stem from ongoing structural reforms and significant investment demand in the transition to free markets.